Tesla turns up heat on rival carmakers in China
Tesla delivered its first mass-market Model 3 from its Shanghai factory to Chinese customers on Tuesday, turning the screw tighter on foreign carmakers as they struggle to make the switch to electric in the world’s biggest auto market.
With the axing of generous subsidies for battery-powered cars and ambitious targets to increase them on the roads, Tesla’s move has intensified the dilemma for auto groups over whether to ramp up electric plans or hold off until the market improves.
China’s car market was on course for a second year of sales declines in 2019 after shrinking for the first time in three decades in 2018.
Some analysts think Tesla’s factory, the first fully foreign-owned car plant in the country, is a competition “game changer” in the electric market as it puts pressure on traditional groups to offer high-quality battery-powered models to Chinese consumers.
“Before [Tesla’s factory] was approved, the traditional manufacturers’ attitude was wait and see, because the investments are huge and they don’t want to make the first move,” said John Zeng, an analyst at consultancy LMC Automotive.
“Then, they realised that Tesla was coming. They realised their competitors are here.”
Elon Musk, Tesla’s chief executive, notched up more pressure on his rivals on Tuesday after he launched plans to build the mass-market Model Y sport utility vehicle in the factory.
But big bets on China’s electric car market look increasingly risky as the worst sales slump for the auto market in decades raises question marks over the reliance of carmakers on Beijing for profits.
As well as the overall slump, sales of new energy cars or NEVs, battery, plug-in hybrid and fuel-cell electric vehicles, have fallen for five straight months since July — a trend analysts expect to continue with further subsidy cuts expected in 2020.
Specifically, critics challenge the strategy of some foreign carmakers, which have committed to joint ventures and the production of electric vehicles using brands of domestic groups.
“There has been a disenchantment with some of the cheap domestic electric vehicles that were dominating the market so much in the early days,” said Janet Lewis, former head of Asian automotive research at Macquarie.
She said 50:50 joint ventures between groups such as Volkswagen, the world’s biggest carmaker by sales, and JAC Group, which will use the Chinese company’s structural designs, a brand unique to the JV, make less sense given the market downturn.
Ms Lewis said that VW might have been better off launching its ID range of electric vehicles — a range that will be sold globally — in China instead.
Other joint venture partnerships have run into difficulties because of changes in regulation that have led to problems in obtaining production permits.
Ford’s joint venture with Chinese automaker Zotye, announced in 2017, has been put on hold because of the failure to gain a production licence. Spotlight, BMW’s JV with Great Wall Motors, is also awaiting a permit, although the German group is confident it will gain one in time for the start of production in 2022.
At the same time, Michael Dunne, founder of consultancy ZoZo Go, said that government quotas for electric vehicles, which will rise to a target of 25 per cent of all car sales by 2025, has put pressure on carmakers to speed up plans for production of battery-powered vehicles.
“The Chinese government quota system policy has real teeth. There is no easy workaround,” he said.
But the market reversal is making many producers pause, Mr Dunne added. “Everyone is wondering if China might roll back its determination to lead the world. Everyone is thinking how to not commit fully.”
Robin Zhu, an automotive analyst at AllianceBernstein, said: “On the ground, within the companies, there has come a realisation that [the switch to electric vehicles] isn’t working. You have seen some quite public grumbling from investors, but from a government point of view they still want to do this.”
Mass market producers, such as VW and Ford, are expected to face the biggest problems as demand has fallen most sharply in that segment, but even at the luxury end there are doubts, with some warning there may not be enough appetite among wealthy Chinese consumers for premium branded electric cars to justify the big investments made by these manufacturers.
However, most critically, all eyes are on Tesla and whether its sales will take off.
“A lot of people are watching how Tesla does . . . Will consumers warm to a more branded product?” Ms Lewis of Macquarie said.
If customers show a desire for well-known brands such as Tesla rather than the low-value options produced by the joint ventures, then it adds to the argument against foreign car groups rushing to market with JV-produced cars with lesser-known Chinese names that are unlikely to sell as well as the VWs or Fords.
“Everyone was saying that the foreigners were coming in too late, but if they are able to come and hold brand value better, that will prove the right tactic,” Ms Lewis said.